McKinsey on SCM

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McKinsey on SCM Published in 2011

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  • McKinsey on Supply Chain: Select Publications

    January 2011

  • 2Introduction

    As companies around the world try to fully define and settle into the new normal, supply chain is coming to the forefront as a critical lever. It is more important than ever to have a flexible and nimble supply chain that can work with new and innovative products, emerging markets, new manufacturing bases, new suppliers, etc. It is a critical time for supply chain leaders not only to create such flexibility and keep costs down but also keep an eye on the horizon when the strategy wont only be about cutting costs. Thus the balancing act of decisions for short-term gain without long-term impairment.

    As companies head down this path, we at McKinsey would like to share some of what we have learned from the past few years as well as our thinking and global perspectives on what may come and how to approach those challenges.

    Building the supply chain of the future gives our perspective of what the future may hold for supply chains, how to maintain the supply chain as a competitive advantage and plan ahead.

    The challenges ahead for supply chains takes that perspective one step further with results of a global survey asking leaders what they have on their minds and some key aspects of the change toolkit.

    Is your top team undermining your supply chain? specifically addresses how cross-functional leadership will have to change and collaborate to make sure companies can fully reach their potential

    Supply chain yoga digs a little bit deeper into a case example to bring to life the value of a flexible supply chain.

    Lessons from Haiti: Applying world-class supply chain practices when disaster strikes, shares our learnings from the front lines of a horrible natural disaster when supply chains had to be created from scratch overnight. The team learned what was truly important and how to build the most efficient supply chain possible with minimal resources.

    What successful transformations share brings it all down to the bottom linewe may know where we are going but we need a detailed roadmap to get there. This article talks about many of the pitfalls and approaches for successful transformation.

    We hope you find these articles helpful and thought-provoking, we look forward to discussing these and other topics of interest to you.

  • 3McKinsey on Supply Chain: Select PublicationsJanuary 2011

    Building the supply chain of the future

    The challenges ahead for supply chains.

    Is your top team undermining your supply chain?

    Supply chain yoga

    Lessons from Haiti: Applying world-class supply chain practices when disaster strikes

    What successful transformations share

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    10

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    Table of Contents

  • 4Getting there means ditching todays monolithic model in favor of splintered supply chains that dismantle complexity, and using manufacturing networks to hedge uncertainty.

    Yogesh Malik, Alex Niemeyer, and Brian Ruwadi

    Yogesh Malik and Brian Ruwadi are principals in McKinseys

    Cleveland of ce; Alex Niemeyer is a director in the Miami of ce.

    Many global supply chains are not equipped to cope with the world we are entering. Most were engineered, some brilliantly, to manage stable, high-volume production by capitalizing on labor-arbitrage opportunities available in China and other low-cost countries. But in a future when the relative attractiveness of manufacturing locations changes quicklyalong with the ability to produce large volumes economicallysuch standard approaches can leave companies dangerously exposed.

    That future, spurred by a rising tide of global uncertainty and business complexity, is coming sooner than many companies expect. Some of the challenges (turbulent trade and capital flows, for example) represent perennial supply chain worries turbocharged by the recent downturn. Yet other shifts, such as those associated with the developing worlds rising wealth and the emergence of credible suppliers from these markets, will have supply chain implications for decades to come. The bottom line for would-be architects of manufacturing and supply chain strategies is a greater risk of making key decisions that become uneconomic as a result of forces beyond your control.

    Against this backdrop, a few pioneering supply chain organizations are preparing themselves in two ways. First, they are splintering their traditional supply chains into smaller, nimbler ones better prepared to manage higher levels of complexity. Second, they are treating their supply chains as hedges against uncertainty by reconfiguring their manufacturing footprints to weather a range of potential outcomes. A look at how the leaders are preparing today

    offers insights for other companies hoping to get more from their supply chains in the years to come.

    Twin challengesThe stakes couldnt be higher. In our industry, says Jim Owens, the former chairman and CEO of construction-equipment maker Caterpillar, the competitor thats best at managing the supply chain is probably going be the most successful competitor over time. Its a condition of success.1 Yet the legacy supply chains of many global companies are ill-prepared for the new environments growing uncertainty and complexity.

    A more uncertain worldFully 68 percent of global executives responding to a recent McKinsey survey said that supply chain risk will increase in the coming five years.2 And no wonder: the financial crisis of 2008 dramatically amplified perennial sources of supply chain uncertaintynotably the trajectory of trade and capital flows, as well as currency valueseven as the crisis sparked broader worries about the stability of the financial system and the depth and duration of the resulting recession. While many of these sources of uncertainty persist, its important to recognize that new, long-term shifts in the global economy will continue to pressure supply chains long after more robust growth returns.

    The increasing importance of emerging markets tops the list of these uncertainties. Economic growth there will boost global energy consumption in the coming decade by about one-third. Meanwhile, the voracious appetite of China and other developing countries for such resources as iron ore and agricultural commodities is boosting global prices and making it trickier to configure supply chain assets. Worries about the environment are growing, too, along with uncertainty over the scope and direction of environmental regulation.

    These long-term trends have knock-on effects that reinforce still other sources of uncertainty. Growth in developing

    Building the supply chain of the future

    1 Jim Owens made this remark in an interview conducted by Hans-Werner Kaas on September 20, 2010. For more from that interview, read My last 100 days, on page 104.

    2 For more, see The challenges ahead for supply chains: McKinsey Global Survey results, mckinseyquarterly.com, November 2010.

  • 5countries contributes to volatility in global currency markets and to protectionist sentiment in the developed world, for example. Whats more, different growth rates across various emerging markets mean that rising labor costs can quickly change the relative attractiveness of manufacturing locations. This past summer in China, for example, labor disputesand a spate of worker suicidescontributed to overnight wage increases of 20 percent or more in some Chinese cities. Bangladesh, Cambodia, and Vietnam experienced similar wage-related strikes and walkouts.3 Finally, as companies in developing markets increasingly become credible suppliers, deciding which low-cost market to source from becomes more difficult.

    Rising complexityManufacturing and supply chain planners must also deal with rising complexity. For many companies, this need means working harder to meet their customers increasingly diverse requirements. Mobile-phone makers, for example, introduced 900 more varieties of handsets in 2009 than they did in 2000. Proliferation also affects mature product categories: the number of variants in baked goods, beverages, cereal, and confectionery, for instance, all rose more than 25 percent a year between 2004 and 2006, and the number of SKUs4 at some large North American grocers exceeded 100,000 in 2009.

    Meanwhile, globalization brings complexities as rising incomes in developing countries make them extremely desirable as markets, not just manufacturing hubs. Efficient distribution in emerging markets requires creativity, since retail formats typically range from modern hypermarkets to subscale mom-and-pop stores. In Brazil, for example, Nestl is experimenting with the use of supermarket barges to sell directly to low-income customers along two tributaries of the Amazon River.5

    Meeting the challengeIn such a world, the idea that companies can optimize their supply chains onceand for all circumstances and

    customersis a fantasy. Recognizing this, a few forward-looking companies are preparing in two ways. First, they are splintering their traditional monolithic supply chains into smaller and more flexible ones. While these new supply chains may rely on the same assets and network resources as the old, they use information very differentlyhelping companies to embrace complexity while better serving customers.

    Second, leading companies treat their supply chains as dynamic hedges against uncertainty by actively and regularly examiningeven reconfiguringtheir broader supply networks with an eye toward economic conditions five or ten years ahead. In doing so, these companies are building diverse and more resilient portfolios of supply chain assets that will be better suited to thrive in a more uncertain world.

    From one to manySplintering monolithic supply cha